There was no shortage of parental wisdom in the household of my youth. And, while neither of my parents had an abundance of formal education, growing up in the Great Depression had taught them many important life lessons. My mom would frequently remind us to set aside and save some money “for a rainy day.” It’s a shame that so many Americans failed to learn these important financial axioms.

I’m basing this lament on some recent data released from a survey by bankrate.com. They found that 30 million Americans had tapped retirement savings in the last 12 months to pay for an unexpected expense. Baby boomers were the most likely age grouping to have done so as some 26% of those aged 50-64 answered that their finances had deteriorated and 17% had used a 401k or similar retirement savings account to pay for an emergency expense.

Some years I spent in the in-bound call center of a major 401k plan administrator also reinforced this message. Three fourths of the calls we took were to assist a plan participant who was originating a 401k plan loan to themselves. Likewise, many calls were for “hardship withdrawals” which do even greater damage to a participant’s retirement preparation. Many callers would comment that they “had to do it because of an unforeseen emergency” such as a car repair, a leaky roof or what have you. I can remember several poor souls who paid a $100 loan origination fee (levied by their employer) to borrow $1,000 from their balance.

PEOPLE!!!! —–Cars are going to have problems, roofs are going to leak and kids are going to break their eye glasses. These shouldn’t be surprises in life but rather they are certainties……………..the only surprise should be the form in which the emergency will take. Emergency funds should be in place for emergencies!!!

We made numerous postings in 2011 and 2012 that huge imbalances of cash flows into bonds funds and away from stock funds suggested “many were fearful”. The advice of Warren Buffet, who quipped that investors “should be greedy when others are fearful” proved to be prudent during this time frame, as the US stock market continued to climb while the bond market peaked. While we discourage market timing in general, we do like to pay attention to these overall trends as they allow us to add to “underowned” areas in our portfolios at reasonable prices.

A recent area of note where the hot money has seemed “fearful” is in emerging markets. Their equities have done poorly over the past year and their bonds have also seen declines of late. According to EPFR Global, investors pulled a record of $37 billion from emerging market stock and bond funds in June. While this trend may be early in its development, there’s no question that at least some investors are demonstrating fearful behavior. When one combines this with the reasonable Price-to-earnings ratios present in the emerging markets, one has to ask, “Would Warren Buffet see this as a buying opportunity?”

Several weeks have passed since the June 12,2012 posting (“Waiting to exhale…) which suggested that recent corrections in commodities prices such as iron ore still had a ways to go. A logical extension of this thinking suggested that the major international mining concerns BHP Billiton, Rio Tinto, Vale SA et al were a classic “value trap.” That is, despite their stock selling at multi year lows, they still had further to fall based on the long term trends in commodity prices. What’s transpired since then? A pair of recent Wall Street Journal articles suggest that the “cracks are beginning to widen.”

” In “Shock, Ore and Chinese Steel” (August 1), it’s noted that the China Iron and Steel Association claims that China’s steel makers’ profits fell 96% in the first half of the year. The article’s author, Liam Denning suggests that while the Chinese steel makers may compensate for diminished domestic steel demand by juicing exports, these developments don’t bode well for any players in the steel production value chain. And, despite the decline of iron ore prices to $117 per ton (from 2011 high’s at $170), increased iron ore mining capacity is coming on stream in 2012-14 equivalent to 27% of 2011 global demand. A related article two days later (“With Demand Sputtering, Miners Pause Big Projects’) cites increased caution on the part of all mining concerns, regardless of commodity.

History has shown that commodity producers habitually overproduce by bringing expanded capacity onstream in the face of declining demand. History is repeating itself once again.

World equity markets have retreated to their Eurozone sovereign debt induced funk, with many pointing to the upcoming Greek elections as a potential turning point. The conventional thinking is that Greece’s exit from the euro is a foregone conclusion and that the Greek electorate’s distaste for bailout induced austerity will set a chain reaction in motion. Of course, no one knows the exact course of future events with any certainty but some contrarians have suggested that this plethora of uncertainty has created a buying opportunity in undervalued international equities all over our increasingly interconnected world.

A recent commentary by author (“Value.able: How to Value the Best Stocks and Buy Them for Less Than They’re Worth”) and fund manager Roger Montgomery points out some seemingly unrelated facts which, when combined with the European debt situation, should make these contrarians swallow especially hard before diving into these treacherous international waters.

Montgomery points out, to no one’s surprise, that China’s growth rate has been slowing. The multi-year stretch of powerful growth within the world’s most populous nation had driven emerging nation stock markets upward in the middle of this decade. And while the past few years have seen some pullback, one could argue that stock markets in countries like Indonesia, Brazil, Australia and the CIS that export commodities to China, are set for a rebound.

However, Montgomery adds some insightful historical perspectives. He notes that from 1982 to 2002, iron ore prices traded within a range of US $11 and US $15 per ton. The China infrastructure boom pushed these same prices up to a high of US $187 per ton in 2011 and they are still trading in the US $130-150 range. While no one is postulating that iron ore will fall back to US $15, it’s easy to imagine that any iron ore price correction still has a long way to go. The price trend may be further amplified by the substantial expansion of iron ore mining capacity which is coming on stream in the next few years.

Further complicating this supply-demand situation is the current overvaluation of Chinese residential real estate. Montgomery estimates its market price (at construction) at 350% of China’s gross domestic product. Only Japan in 1989 and Ireland in 2007 have reached these lofty levels and both saw subsequent housing price collapses. If the Chinese real estate bubble bursts, commodity prices will surely bear the brunt of its impact.

So while everyone’s fixated on the events in Europe as the driver of international equity prices, a far more dangerous situation may have developed on the other side of the world.

Our December 14 posting suggested that “others” may becoming “fearful” as evidenced by mutual fund flows. This trend was reinforced recently as the Investment Company Institute reported that long term mutual funds experienced outflows of $1.98 billion for the week ended December 21. Equity mutual funds had net outflows of $4.57 billion with $2.69 billion exiting domestic stock mutual funds and $1.88 billion leaving non-US equity mutual funds. Net inflows into bond, and balanced mutual funds reduced the overall outflows to the $1.98 billion total (money market funds are excluded from the “long term” fund totals).

These continued equity fund outflows come at a time when stocks are seemingly becoming “less expensive”. As of the final week of the year, the trailing P/E ratio of the S & P 500 had fallen to 14.48 compared to 18.05 a year ago. Likewise, the equivalent statistics for the P/E based on forecasted 2012 earnings is currently 12.58 versus 14.56 a year earlier. Clearly, this year’s volatility has made investors less enamored with the stock market.

A famous 1980 Time Magazine cover story entitled “The Death of Equities” ushered in an unprecedented 20 year bull market. As people become increasingly disenchanted with the gyrations of the stock market, we may want to keep our eyes on the newstand headlines………………………..

Since China has been the growth story of the new millenium, it’s tempting for investors to desire ” a piece of the action.” Some Chinese companies are making their way on to our stock exchanges, but much like with other frontier business opportunities, buyers should exercise caution.

The U.S. Securities and Exchange Commission recently issued a bulletin about the process some of these companies have used to get listed on the exchanges. Ordinarily, new publicly traded stocks go through an exhaustive Initial Public Offering (IPO) process which requires them to file detailed registration documents with the SEC. The purpose of these documents is to improve the transparency of the new listing information and prevent the fraud that was very common in the markets of the go-go 1920’s.

Several of these Chinese corporations have skirted these investor protection processes by pursuing stock exchange listing via a “reverse merger.” In a reverse merger, a private company gets its stock traded on a public exchange by agreeing to merge with an existing publicly traded “shell company”. The shell company has few or no operations of its own and survives after the merger. Its control, however, is ceded to the shareholders of the private firm with which the shell company just merged. By entering the exchange via this “back door”, the private company goes public without having to file all of the informational documents required during an IPO. So, if you’re tempted by these newly available Chinese stocks, take some time to do your due diligence. Read the SEC bulletin at www.sec.gov/investor/alerts/reversemergers.pdf. There’s no telling what you might find!!

Franklin Templeton Investments reports that investor expectations of the future vary greatly by age. A majority of Americans (61%) aged 18-34 felt that the best stock investment opportunities over the next ten years would lie outside the United States. This is in contrast to Americans aged 65 and older. Only 38% of this elder group felt that the best opportunities would not be found within the U.S. Perhaps this finding reflects a more global perspective by the younger respondents; however, it may also reflect a pessimistic outlook heavily influenced by the current U. S. economic woes.

There has been a lot of interest in emerging markets mutual funds in the past few years. Their strong relative performance explains much of the “buzz”, but their value as a diversifying element in a broader portfolio cannot be denied. However, one must not equate single country emerging market funds with their more broadly diversified cousins. Investing in a fund holding the stocks of a single country is a far more risky proposition than choosing a fund which invests in multiple developing markets.

This fact is highlighted by a quote from David Herro, fund manager of several Oakmark international funds who was selected by Morningstar as their International Manager of the Decade. When asked which country is the least investor friendly, David replied, “The least investor-friendly country that I’m familiar with has to be Russia, because there is not consistent rule of law. At this point it isn’t a transparent place to invest.” Despite these circumstances, there are numerous mutual funds which invest only in the stocks of Russian companies. It would be prudent to heed Herro’s comments before committing dollars to such single country mutual funds.